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Monetary union without fiscal coordination may discipline policymakers

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  • Beetsma,Roel M.W.J.
  • Bovenberg,A. Lans

    (METEOR)

Abstract

We show that, with benevolent policymakers and fiscal leadership, monetary unification reduces inflation, taxes and public spending. These disciplining effects of a monetary union, which rise with the number of fiscal players in the union, are likely to raise welfare. Joining an optimally designed monetary union is particularly attractive if fiscal authorities do not care about inflation. Fiscal coordination offsets the disciplining effects of monetary unification. Hence, subsidiarity in fiscal policymaking may enhance welfare. Keywords: monetary union, fiscal leadership, common central bank, discipline, optimal institutions, inflation, taxation, spending, fiscal coordination.

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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 024.

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Date of creation: 1995
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Handle: RePEc:unm:umamet:1995024

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